Don't fear China, say top currency analysts seeing Asian gains

[SINGAPORE] The best forecasters of Asian currencies last quarter saw beyond the turmoil created by China's slump to predict the gains their competitors missed. Now they're breaking from the pack once again.

While the market consensus is for broad declines, ING Groep NV and Commonwealth Bank of Australia expect at least seven of 10 emerging-Asia currencies tracked by Bloomberg to appreciate by year-end, building on their strongest quarter since 2010.

Rather than being a source of disruption, the banks forecast China will be an anchor for its neighbors through the rest of this year, driving gains in their currencies. It will do that, they say, by supporting yuan gains and by continuing to keep the currency's fixing against the dollar stable.

"There are strong economic and political reasons for the People's Bank of China to stay the course in the fixing," said Tim Condon, head of Asia research in Singapore at ING, which led Bloomberg's first-quarter rankings for predicting the region's currencies.

"That, and a soft US dollar against the majors, will allow Asian currencies to perform."

The gains in everything from Malaysia's ringgit to the Taiwanese dollar are reminding investors of the relative strength of many Asian economies even as China struggles with the slowest growth rate since the 1990s. The 10 Asian economies covered are forecast by analysts in separate surveys to expand 4 per cent this year, more than twice the pace of major developed nations.

And that's after China's efforts to weaken the yuan fixing early in the first quarter roiled world markets, at one point wiping US$9 trillion off the value of global stocks.

ING sees seven of 10 of the region's exchange rates appreciating versus the dollar through this year. Second-placed CBA predicts all 10 will. That's in contrast to the median estimates of analysts surveyed by Bloomberg, which envisage declines in every currency by year-end.

A more dovish Federal Reserve will help the Asian currencies as will "cheaper" valuations for the Korean won and Malaysian ringgit after big drops over the past few years, CBA said.

The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region's 10 major currencies excluding the yen, rose 1.9 per cent in the first three months of this year, after dropping 8.3 per cent over the previous six quarters.

The ringgit led gains, climbing 10 per cent, followed by a 5.2 per cent advance in the Singapore dollar and 4 per cent for Indonesia's rupiah.

ING's Condon sees the ringgit strengthening 7.2 per cent from current levels by the end of the year.

The currency, which plunged 19 per cent in 2015, was oversold amid allegations of wrongdoing surrounding state-investment company 1Malaysia Development Bhd and Prime Minister Najib Razak, he said.

The Dutch lender forecasts gains of 1.8 per cent in Thailand's baht and 1.2 per cent in South Korea's won.

CBA predicts the won will outperform the rest of the region this year to strengthen 9.9 per cent. It sees gains of 5.5 per cent each in the ringgit and India's rupee.

Given the Fed's dovish turn, futures traders are pricing in at most one interest-rate increase this year, less than the four that officials signaled in December.

US policy makers have since scaled back their estimates to two moves. That has pushed a gauge of the dollar versus its major peers down by more than 4 per cent in 2016.

"We see the US dollar drifting lower into the end of the year and Asia's current-account surpluses generating Asian currency strength," said Richard Grace, chief currency and rates strategist at CBA in Sydney. "We believe the yuan will strengthen further. Most of the bad news is priced into China's economy."

CBA predicts a 2.7 per cent gain in the yuan by the end of the year, while ING sees a marginally smaller advance.

ABN Amro Bank NV, the third-most accurate forecaster in Bloomberg's rankings, projects a 3.5 per cent decline.

The PBOC's fixing for the yuan on Friday was 0.3 per cent stronger against the dollar than on Dec 31.

Foreign-exchange reserves unexpectedly rose by US$10.3 billion in March after falling by US$323 billion over the previous four months, which may help the currency maintain those increases. The "more stable" fixings have been instrumental in curbing capital flight and restoring confidence, said ING's Condon.

Australia & New Zealand Banking Group Ltd is less optimistic.

It points out that the PBOC's appetite for trade-weighted weakness in the yuan appears to be increasing.

A Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 13 exchange rates, is down 3.3 per cent this year. If it keeps falling, it may raise concern about how far China is willing to let the yuan weaken - particularly against the currencies of its neighbors, said Khoon Goh, a senior foreign-exchange strategist at the bank in Singapore.

ABN Amro sees six of the seven emerging-market Asian currencies it covers falling by the end of the year. It predicts that only Thailand's baht will strengthen, though it doesn't follow the ringgit, peso or Hong Kong dollar.

The Dutch lender is still more optimistic than the median estimates in Bloomberg surveys, which foresee declines of 0.1 per cent to 7 per cent in the 10 regional exchange rates.

"The main reason we are less bearish on Asian currencies" is that we don't expect the Fed to raise rates this year, said Roy Teo, a senior currency strategist at ABN Amro in Singapore.

"Euro and yen weakness will be more modest, hence giving some support to Asian currencies."

BLOOMBERG